Mahindra & Mahindra Limited (MOM.F) Earnings Call Transcript & Summary

Good morning, everyone. It's a pleasure to be here with you today. And we have an exciting announcement, as you've seen, something that we feel will add significant value for our shareholders. And let me start with outlining some of the reasons for it and how we're going to go about it. So let's start with a question that we asked first and that you may have today. Why life insurance? As we looked at various opportunities, we felt that this is a very compelling one. And in fact, 1 that I had mentioned about 1.5 years ago, when we were looking at various different options, saying this could be a potential for us to look at. It's 1 that can create meaningful value, which you will see. It was important for us to ensure we had a strong right to win. And many of you will recall the criteria that we had put out, saying anything new that we do will follow this criteria and we will show that criteria again. But in many ways, this is not something new. This is an extension of financial services for us as we strive to be the financial services provider of choice, insurance is an important part, and that's the reason why we feel it will be very positive for Mahindra Finance from a financial services standpoint, it's going to be accretive to ROA. And from an investment standpoint, we expect to invest about INR 250 crores a year for the first 5 years. The real investment will start in F '28 because of the regulatory approvals required, it will take that time to get up and running one. And we expect that in the first 5 years, we would need to invest about INR 250 crore a year from a Mahindra standpoint. Manulife will invest an equal amount. And for us, that would be roughly about 1/3 of the dividend that we would expect from Mahindra Finance in that time period as well. And our aspiration here is to be the #1 life insurer for rural and semi-urban India and serve urban customers through leadership in protect consolidations. If we move to the next page, we see the opportunity here. There is a high protection gap in India. And you see it is significantly lower than many countries even compared to Thailand and Malaysia, we are significantly lower. We do have a vision that has been outlined for Viksit Bharat where everyone will be insured. And that, again, is something that's going to be positive in terms of momentum for the insurance industry. More importantly, in rural and semi-urban. If you look at the demographics, the middle to high income households are growing rapidly. They will be 50% of the population by fiscal there is a much -- a greater need for insurance in a world today that's a lot more uncertain. And if you combine that with rising disposable income and awareness and security for the family being an important factor that need only gets accentuated. And from an access standpoint, while 65% of our population is in rural India, which account for 45% of GDP. Only 2% of our life insurance branches are in rural areas. And that's where we have a real opportunity to create a model that can be distinct and therefore, give us a much greater market presence. The critical success factors in this space are 1 brand and trust. Trust is probably the most important factor because insurance is taken by someone who is not likely to be there when the insurance benefits are paid to the person's family. And they need to be certain that the company that gives me insurance is going to take care of my family. Control over distribution is an important factor, and that's where Mahindra Finance comes in. Also, it requires capabilities that enable strong underwriting that enable a product set that is right for the customer base at the same time, 1 that makes sense from an insurance standpoint. And that's where Manulife comes in as the top-tier global insurance company, a company that also has significant capabilities in reinsurance, and that will also help the business significantly. And over and above that, as everywhere, execution excellence is something that's critical to be able to achieve success and something that we have been able to demonstrate across multiple businesses. Let's talk a little more about Manulife. This is a leading Canadian life insurer and asset manager in Asia, it's among the top 3 and understands global markets very well. Globally, it has [ 1.1 trillion ] in assets under management, [Audio Gap] the 16.2% core ROE in 2024. And we have a partnership with Manulife already in our asset management company, and they're wonderful partners. It's something that I think will be very, very positive for the Mahindra Group overall. You heard me say this before. We need a strong right to win. What we mean by right to win is why would a customer select us versus anyone else. They have all the choices. And in this case, our right to win is offered by both partners, the brand and trust that Mahindra brings. The existing customer base in Tier 2 and 3 cities and actually even beyond that, a very distribution and branch network with Mahindra Finance a treasury relationships to [indiscernible] Banker, and we have some of them that will come into play. Manulife brings a product know-how, underwriting, risk management, reinsurance and very strong experience in Asia, in particular, in agency management. And both together will bring leadership in technology, digital and AI because both Mahindra and our leaders in that space. This helps add to our financial services footprint with lending, asset management, insurance broking and life insurance. A detailed slide here, but I will just go over the key points I've started with our expectation earlier, and how we're going to go about this is have a strong order protection focus. That's what the Mahindra brand stands for from a trust standpoint as well. Mahindra Finance's distribution has 1,345 branches, deep rural and semi-urban consumer coverage and access to 25 lakh plus live customers. To add to this also is the Mahindra network and the synergies we will have across all our businesses in terms of being able to access customers. We have Mahindra 1 customer database with customer promotions to be able to offer products, and this is a product that fits exactly into what customers will want. Add to that, premium agency network that we would build, given some of the strength that Manulife has in that space as well and create a digitally enabled ecosystem in some ways, lead with tool and our aspiration there is to be a leader in the digital space, thereby creating a very sharp and focused strategy that will enable us to be both effective and efficient in this space. The important question here is what are the financial returns. And yes, that often is the first question that we ask. And as we've done some very detailed work to start with the capital commitment is roughly INR 250 crores a year for the first 5 years. With a total of INR 3,600 crores for 10 years, this is, again, from a Mahindra perspective, from a JV perspective, Manulife will contribute the same amounts. And the global reinsurance expertise can potentially help bring it down further as well. So that's something that we will see over time. This can result in a valuation for this business of INR 18,000 crores to INR 30,000 crores in 10 years. And this we feel our conservative numbers. There is potential upside to this. If a composite license is allowed, then that valuation can increase fairly significantly. There are other things that we have in play that have not been tested yet, and therefore, we haven't added them to the business plan. This is a plan we feel we can execute and others will only add to the upside. But as you know, insurance is a long term business. And we're building this business for the future. As we go beyond 10 years, this is very well positioned to create a lot more value, and in the short run, it is accretive for Mahindra Finance ROA. So very, very compelling from a financial standpoint. In summary, these are the 4 points that we had put up in the investor meeting we had in June 2024 that we would look at these 4 points before looking at any opportunity. And that's a strong right to win, meaningful potential, we feel we can achieve market-leading returns here, and we have a strong ability to execute. And that, in summary, is a synopsis of our foray into life insurance. And we can now open it up for questions.

Thank you, Anish. [Operator Instructions] Ajox, please go ahead.

A couple of questions there. One is, where does this -- does it sit on the Mahindra Finance or under our Mahindra?

So this would sit under Mahindra, we debated that a fair bit. It will obviously have a very strong Mahindra Finance tie and a distribution agreement has been signed with Mahindra Finance. The reason for it to sit in Mahindra is that it is much easier to access the synergies across the group. But more importantly, from a regulatory standpoint, the NBFC regulatory landscape is evolving significantly. And as you see, insurance companies at multiple NBFCs have, all of them are held by the parent and not by the NBFC for that reason. At the same time, we are conscious of the fact that we have to maintain that discipline in capital allocation. And therefore, the way we look at this is, would earmark 1/3 of the dividends we get from Mahindra Finance as investments that we would make in this JV.

Perfect, sir. Just a follow-up to your answer on capital allocation and your initial comments on protection being a purpose you must be aware that protection is a capital-intensive business. So what is the basic math you're building with on this INR 250 crores? So if more production ramps up, there's necessity of allocating more capital, right?

So the INR 250 crores accounts for the fact that we're going to have much higher protection than anyone else, protection also is more profitable, and it has a greater persistence and therefore, sustainable long term as well. So the capital aspects of protection, the back that protection is going to be a higher percentage for us. Those are all in the business plan right now. Okay.

Manas, you can go ahead.

I'm actually an insurance analyst, not a M&M analyst, but wanted to understand from that perspective, typically takes a good decade to give your first accounting profit and then even longer to cover up losses. So that is 1 question. How are you guys thinking about gestation of this business. Second, you're trying to do protection in rural semi-rural setup, which practically very few people have tried. And where do you think that execution or need for that product in the customer lenses. So those are 2 questions.

So Manas, first, you're right, it will take 10 years for us to break even, possibly even slightly longer than that. And that is the nature of the insurance business. And the embedded value is what creates valuation for the company, and that's what we're looking at here. But this is a company we are building for the next 20, 30 years. This is not something we're doing for 10 years, and we see much greater value in there. Protection is going to be a focus for us, but not the only thing. We will obviously offer other products as well. And we see protection as being important, even in rural and semi-urban first for folks who take loans because our customers always are very concerned about what happens -- what will be the outcome if something happens to me. And therefore, life insurance being added to a loan is one, something that we do in a number of cases today and something that will continue. And beyond that, 1 protection is much easier to sell. The premiums are much lower, and that's something we feel that it just has not been done well enough in rural areas right now. As I showed earlier, only 2% of life insurance branches are in rural and semi-urban areas. And as we talk more about the product, we see incomes rising there, and we feel that insurance will have an important play there, and some will want products besides protection, which we will offer as well. We just feel that if we can offer a very strong protection product, it's a spike for us in that sense. But for rural and semi-urban it's going to be a range of products for Urban, we will play more on the protection side.

Understood. So it will be credit life rather than pure protection? Is that the right way to think of it?

That is the right way to think of it correct.

Kapil, you're unmute.

Can you hear me?

Yes, go ahead please.

So you've always talked about the fact that you will continue to fund the businesses as long as they are meeting certain metrics as far as performance is concerned. Now this -- because this takes a long time to break even, what are the metrics that we should track for performance of this business. And part of my lack of understanding of the segment, but if you could give some color here.

Yes. So Kapil that's a great question. And that's 1 thing that is very important for us. So what we would track is, are we on plan with regard to the business that we want coming in? What is the market share that we have in certain areas? What is the embedded value that's been created, and is it being created at the returns that we want. The investments in the short term will create a longer gestation period in that sense for profits. But there are various other metrics that we have outlined, as I just talked about, that will tell us that is this business being created the right way? And will it therefore have the value that we can show our shareholders in a 10-, 15-, 20-year time period. But we're not going to wait, as you rightly said, for 10 years to see if there's value. This is something that we would actually look at every month as we monitor the business.

Sure, sir. And second was on the -- you've talked about building a comprehensive financial services offering. So can there be more things that you would also look at as opportunities? Are you looking at more things, for example, it could be general insurance or well, I'm not asking you to announce something, but just understanding your thought on the same.

So if the insurance regulator allows a composite license, then general could be a good upside for this business as well. In general, again, there are lots of synergies we have across the group. In terms of wealth or other areas, I would say we have not been looking at that closely, but what we are looking at closely is diversification within Minder finance. So as we look at the next phase for Mahindra Finance, it's a business that I would say has completed its first phase. We'll talk a lot more about that at our investor meet next week. And as you've seen from recent results as well, has been able to achieve everything we've said it should, the next phase is pivoting to growth and looking at diversification. Now all of that will happen within Mahindra Finance. In this case, given the regulatory landscape as I explained, we had to have this business at the parent level. But as we look at mortgage, SME in a bigger way, all of that will happen within Mahindra Finance, and that's the diversification we would look at in that business.

Rakesh?